Summer Internship Project

Cost of Capital
Sub heading

Submitted in partial fulfillment of MBA program 2009-11

Submitted by

Name= chetan prakesh sankhla Roll No= 11
Company Guide Faculty Guide

N.C. Jain Asst. Vice President Finance Shree Cement Ltd.

amit shrivastav

MAHARISHI ARVIND INSTITUTE OF ENGINEERING & TECHNOLOGY jaipur

Certificate of Approval
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The following Summer Internship Report titled "Cost of Capital" is hereby approved as a certified study in management carried out and presented in a manner satisfactory to warrant its acceptance as a prerequisite for the award of Post-Graduate Diploma in Business Management for which it has been submitted. It is understood that by this approval the undersigned do not necessarily endorse or approve any statement made, opinion expressed or conclusion drawn therein but approve the Summer Internship Report only for the purpose it is submitted. Summer Internship Report Examination Committee for evaluation of Summer Internship Report

Organizational Guide

: Signature…………………………. : Name: Mr. N. C Jain : Designation: Assist. Vice President, Finance : Address: Bangur Nagar, post box no -33, Beawar 305901, Rajasthan, INDIA : Tel No: 09214337403 : Email: jainnc@shreecementltd.com

Certificate of Approval

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The following Summer Internship Report titled "Cost of Capital" is hereby approved as a certified study in management carried out and presented in a manner satisfactory to warrant its acceptance as a prerequisite for the award of Post-Graduate Diploma in Business Management for which it has been submitted. It is understood that by this approval the undersigned do not necessarily endorse or approve any statement made, opinion expressed or conclusion drawn therein but approve the Summer Internship Report only for the purpose it is submitted. Summer Internship Report Examination Committee for evaluation of Summer Internship Report

Institutional Guide

Acknowledgement

At the outset, I offer my sincere thanks to SHREE CEMENTS LTD. for giving me an opportunity to work on the project titled, “Cost of Capital”.

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Last but not the least. N. First of all I would like to express my gratitude to Mr. Jain (Assist. I would like to give credit to all sources form where I have drawn material for this project. Delhi which provided me this opportunity to interact with this organization and understand the intricacies of the corporate world.C. Finance) who despite his tight schedule spared time for discussions and informed about basic groundwork and direction without whose support. I am highly grateful to the management at Shree Cement for giving me this opportunity to work on a dream project and in the process harness myself with the huge learning on all aspects. I am grateful to my institute Fortune Institute of International Business. Yogesh Sharma 4 . I appreciate him of giving me an option of selecting such a wonderful project.It’s a moral responsibility of each individual to acknowledge the help of each individual who has made your journey smoother for you. I am thankful to all employees at Shree Cement Ltd. The learning has been immense for me from this project. for providing me all the information and help I required for completion of this project. this report would not have been possible. Vice President.

No.Sr. 1 2 3 4 5 6 7 8 9 10 11 12 Particulars Preface Focus of the Project The Indian Cement Industry Cement-types The Cement Industry Structure Characteristic of Cement Industry Major Demand Drivers Major Players in Cement Industry Cement Manufacturing Business and Managerial Challenges Risk and Return of Cement Companies Introduction of Shree Cement Limited The Company’s Vision & Mission Marketing Product & Policies Trade & Non-Trade Network SWOT Analysis Award of the Company Page No. 7 8 9 10 11 21 23 24 27 30 31 31 33 34 35 38 39 41 43 46 48 13 14 15 Concept of “Cost of Capital” Classification of “Cost of Capital” Computation of specific Costs Cost of Equity Cost of Debts Capital Structure Analysis of Capital Structure 5 .

such as promotion.PREFACE About three decade ago. reorganization. 6 . the scope of financial management was confined to the raising of funds. As a consequence. the traditional finance texts were structured around this theme and contained description of the instruments and institutions of raising funds and of the major events. whenever needed and little significance used to be attached to financial decision-making and problem solving.

they occupy the key position in top management areas and play a dynamic role in solving complex management problems. When funds were raised. consolidation etc. It is their duty to insure the funds are raised most economically and used in the most efficient and effective manner. and arranging funds. merger. whenever directed to do so. 7 . theory and its implication. the emphasis shifted to the judicious utilization of funds. different approaches of cost of capital. The Projects Focus On Cost Of Different Component Of Capital And Optimal Capital Structure For Minimizing The Cost And Risk. FOCUS OF THE PROJECT The project is structured for the purpose of getting good insight of. Rather. Today. the descriptive treatment of the subject of financial management is being replaced by growing analytical content and sound theoretical underpinnings. In the mid fifties. They are now responsible for the fortune of the enterprises and are involved in the most vital management decision of allocation of capital. The modern thinking in financial management accords a far greater importance to management decisionmaking and policy.Readjustment. It also discusses the different sources of funds. Because of this change in emphasis. The project is being made as a part of summer training and gives good insight of the topic covered under it. financial management donot perform the passive role of scorekeepers of financial data and information. Capital Structure and Cost of Capital.

has surpassed developed nations like USA and Japan and has emerged as the second largest market after China. with first unit were set-up at Porbandar with a capacity of 1000 tones. In relative terms. The Indian Cement Industry The Indian Cement industry dates back to 1914. Currently The Indian cement industry with a total capacity of about 170 m tones (excluding mini plants) in FY07-08. Per capita consumption has increased from 28 kg in 1980-81 to 115 kg in 2005. India’s average consumption is still low and the process of catching up 8 . the remaining 50% of the capacity remains pretty fragmented.OBJECTIVE OF THE STUDY • To get a good insight of the cement industry • To understand the theory of capital and its implication in business structure • To know about the various sources of funds in the company • To find out the cost of various components of capital and how to minimize it. Although consolidation has taken place in the Indian cement industry with the top five players controlling almost 50% of the capacity.

Infrastructure spending (particularly on roads. The cost of white cement is approximately three times that of gray cement. It is used for mosaic and terrazzo flooring and certain cements paints. It is used as a primer for paints besides has a variety of architectural uses. Types of Cement Cements are of two basic types. Low cost technology and extensive restructuring have made some of the Indian cement companies the most efficient across global majors. South-East Asia and the Middle East are potential export markets.with international averages will drive future growth. Despite some consolidation. White cement is more expensive because its production cost is more and excise duty on white cement is also higher. the industry remains somewhat fragmented and merger and acquisition possibilities are strong.gray cement and white cement. Grey cement is used only for construction purposes while white cement can be put to a variety of uses. a spurt in housing construction and expansion in corporate production facilities is likely to spur growth in this area. Investment norms including guidelines for foreign direct investment (FDI) are investor-friendly. GREY WHITE 9 . All these factors present a strong case for investing in the Indian market. ports and airports). Shree cement does not manufacture white cement at present.

Pozzolona during manufacturing consumes lot of hydration heat and forms ‘cementious gel’. It also minimizes problem of leaching and efflorescence. PPC is hydraulic cement. with a production around 168 mn tones. The whole cement industry can be divided into Major cement plants and Mini cement plants.Portland Cement (PPC) Pozzolona Ordinary Portland cement Pozzolona used in the manufacture of Portland cement is burnt clay of flyash generated at thermal power plants. Major Cement Plants: • • • Plants : 140 Typical installed capacity Per plant : Above 1. The Cement Industry Structure Presently the total installed capacity of Indian Cement Industry is more than 175 mn tones per annum. An additional gel formation leads to lesser pores in concrete or mortar. PPC differs from OPC on a number of counts. Reduced heat of hydration leads to lesser shrinkage cracks.5 mntpa 10 .

Himachal Pradesh. However most set up in AP Most use vertical kiln technology Production cost / tonne . Sri Lanka.400 Presence of these plants limited to the state Infrastructural facilities not the best REGIONAL DIVISION The Indian cement industry has to be reviewed in terms of five regions:• North – Punjab. Karnataka. Delhi.000 to 1. Rajasthan. Tones Production around : 6. MP mainly Typical capacity < 200 tpd Installed capacity around 9 mn. Andaman & Nicobar and Goa 11 • • . Haryana. J&K and Uttaranchal West – Maharashtra and Gujarat South – Tamil Nadu. Rajasthan.Rs.2 mn tones Mini plants were meant to tap scattered limestone reserves. Kerala. Chandigarh. Andhra Pradesh. contractors Wide spread distribution network. Nepal.• • • • • • • Total installed capacity : 170 mntpa Production 07-08: 161 mntpa All India reach through multiple plants Export to Bangladesh. Pondicherry. Sales primarily through the dealer channel Mini Cement Plants: • • • • • • • • • Nearly 300 plants & Located in Gujarat. tie-ups with customers. UAE and Mauritius Strong marketing network. 1.

4 mt in FY10E and 18. 21 mt of capacity was added. followed by 41 mt of additional capacity in FY10 and 18. cement demand grew at a CAGR of 10.9 mt in FY11E. West Bengal. The Industry planned this massive capacity expansion of 108 mt because they had never seen such a good run till FY2006. Assam. 41. Meghalaya. Jharkhand and Chhattisgarh. and Central – Uttar Pradesh and Madhya Pradesh • INDUSTRY CURRENT SCENARIO SECTOR OUTLOOK Indian Cement Industry is set to increase production capacity by 28. This will take the aggregate installed capacity to ~288 mt.5% and average retail price increased by a whopping 41% to Rs 230 per bag. Cement manufacturers made huge profits and the Industry average per tonne of operating profits crossed Rs 1100. During this period.• East – Bihar.9 mt in 12 . which accounts for ~48% of FY08 installed capacity. Driven by theses profitability levels. In the period FY05 to FY08. the capacity utilization rate of the Industry reached an all time high level of ~99% in FY08.3 mt in FY09E. Cement Industry is set to add ~89 mn tonnes of capacity between FY09-FY11E. We expect ~21 mt of capacity addition in Q4FY09. average RoCE level of the Industry crossed the 25% mark. Orissa. In FY08.

SHARE OF CAPACITY ADDITION (REGION-WISE AND TOP 5 GROUPS) 13 .1%) in the East. followed by 13. Of the new capacities.FY11.3 mt (~16.4%) in the North and 13 mt (16. ~ 41 mt (~50%) is expected to be commissioned in the South.

which again is a key component of GDP. which is a determinant of cement demand. ports and power. are also key components of GDP. Historical data of last 12 yrs shows that cement demand in India has increased at the rate of 1. It is expected that cement consumption growth 14 . railways. The demand for cement is directly linked to economic activity and has a high correlation with GDP growth.ANTICIPATED GROWTH IN CEMENT DEMAND Housing construction accounts for around 60-65% of the total cement demand and the balance comes from infrastructure sectors including roads. rural housing. Further. Infrastructure investments and construction activities. depends on agricultural productivity. which are the major drivers of cement demand.27x the growth rate of GDP. among others.

7%. leading to a possible price war. In a scenario where oversupply is inevitable.9% in FY09. also known as world gross domestic product or GWP . Cement demand will consequently grow by 8.6% and 8. was estimated at $65.2%) 15 .6% was led by China (11. While the US is the largest economy. companies could try to increase their market share by decreasing their prices.61 trillion in 2007 by the CIA World Fact book. 7. CAPACITY EXPANSION TO WEAKEN PRICING POWER It is believed that the capacity expansion program will only weaken the pricing power and profitability of the companies in the future.9%) and India (7. Economic Analysis -Key Economic Indicators World GDP.gross world product. FY10 and FY11 respectively. growth in world GDP of 5.would shrink over the next two years due to uncertain economic conditions and slowdown in real estate construction activities. calculated on a nominal basis.

Inflation worldwide 16 .

particularly in two digits. These will adversely affect the performance of industry and companies. Unemployment Rates: 17 . affected commodity prices. This. lead to cost escalations and squeeze on profit margins. resulted in low inflation rates Higher degrees of inflation.The recessionary pressures felt across the globe resulted in a massive decline in the supply of money. in turn. will defeat all business planning.

Interest rates: the rate offered on overnight deposits by the Central Bank or other authority 18 .

causing a fall in national income. 19 .If interest rates increase across the board. then investment decreases.

by contrast. and a low degree of vertical Supply 20 . even if they may hinder trade. On the basis of these characteristics are described the main economic stakes in the sector. of which Portland cement is by far the leader. Demand &Market Demand in the cement industry is typically that of an activity which is mature. In the cement industry demand is by. it differs from other basic industries such as aluminum. It is also characterized by a high degree of horizontal differentiation in terms of location differentiation in terms of quality. each of which comprises numerous customers. Cement is a homogeneous product. steel or glass. Standards therefore do not constitute trade barriers as such. cyclical and with low price elasticity. These standards are often national but in most cases the products of one country can easily be approved in neighboring countries. an experience good. however. dispersed in multiple zones of consumption. supply and market structure. Cement is. Although cement is an upstream industry. its quality is guaranteed by standards with which the supplier has to comply. The demand for cement is geographically widely dispersed and corresponds roughly to population density. so that one supplier’s products can easily be substituted for another. Most of its sales concern about half a dozen commercial varieties. for which demand id concentrated both geographically and in terms of the number of customers. Geographical factors thus determine the structure of the market.Characteristics of Cement Industry This section describes the basic economic characteristics of the cement industry by following the classical approach which consists of successively examining demand. No brand name exists.

• The level of investment costs and the life-span of facilities which determine the rigidity and the duration of the network. gives an initial idea of the density of the network of production units covering the territory. in relation to the density of demand. Expected Demand and Supply Major Demand Drivers 21 .Two economic considerations are important a priori in structuring supply in a market characterized by strong horizontal differentiation: • The trade-off between fixed costs and transport costs which. depending on the economic size of the factories.

Greenfield projects on the anvil Demand – supply balance expected in the next 12 – 15 months Encouraging trend in demand due to pick-up in rural housing demand and industrial revival Industry likely to grow at 8-10% in the next few years Newer capacities in future MAJOR PLAYERS IN CEMENT INDUSTRY: SHREE CEMENT LTD 22 .Present Demand drivers • • • • • • • • Infrastructure & construction sector the major demand drivers. Some demand determinants Economic growth Industrial activity Real estate business Construction activity Investments in the core sector Growth in mortgage business in retail housing Higher surplus income of household Opportunities • • • • • • • growth in the housing sector central road fund established for national highways and railway over bridges to provide the necessary impetus expansion plans.

district Alwar in Rajasthan. It is a leading cement manufacture company in North India and has been participating in the infrastructure transformation of India for over two decades now. located at Beawar.Shree Cement Ltd is a Rajasthan based company.96 million tonnes of Bargarh Cement). 35% of the company products transported are by sea which is the cheapest mode. Shree Ultra Jung Rodhak Cement. Haryana and Delhi. It started operations in the year 1985 and has been growing ever since.5 million tonnes. It has three brands under its portfolio viz. It also has grinding units at Khushkhera. district Ajmer. ACC LIMITED Being formed in 1936. The capacity has grown 25 times since then to 18. district Pali. It is planning to expand the capacity of its wholly-owned subsidiary Damodar Cement and Slag at Purulia in West Bengal. The company has also established two grinding units one at Suratgarh (Rajasthan) and another at Roorke (Uttaranchal). and Ras. THE ADITYA BIRLA GROUP 23 .. ACC Super is one of the company’s well established brands. ACC has a capacity of 22. This is aimed at increasing its presence in the eastern region. near Gurgaon. The company has installed capacity of 10. GUJARAT AMBUJA CEMENT LIMITED GACL was set up in 1986 with 0. Bangur Cement and Rockstrong Cement. in Rajasthan.53 million tonnes of Damodar Cement and Slag and 0.40 million (0. The company plans to increase capacity by 3-4 million tonnes in the near future.2 mn tonnes per annum in Rajasthan.7 million tonnes. The multi-brand strategy makes Shree the number one cement player in Rajasthan. GACL exports as much as 15 percent of its production. Ambuja cement is one of GACL’s well established brands.. Its manufacturing units are located at Beawar. It has earned the reputation of being the lowest cost producer in the cement industry.

Quite often they are supplied in other established 24 . Shriram has a small presence and that too largely in southern Rajasthan. at Jawad in Madhya Pradesh went on stream in 1985. a village in Sirobi in the state of Rajasthan. It lost significant market when Ambuja came to Rajasthan. Grasim has five integrated grey cement plants and six ready-mix concrete plants. In total. Others Other players like Shriram have insignificant share and are highly localized. Pindwara. the flagship of the Aditya Birla Group. Grasim has a total cement capacity of 31 million tonnes and eyeing to increase it to 48 MT by FY 09. Grasim has a portfolio of national brands which include Birla Super. Also operates in the white cement market with Birla as its only competitor. The first cement plant of Grasim. It’s a tough nut player which is outside CMA (Cement Manufacturer’s Association) and is prime reason for driving prices low in markets. a subsidiary of Grasim. Birla Plus. Finally Grasim acquired controlling stake in Ultra Tech Cement Limited (Ultra Tech). Shree Digvijay Cement.2 MTPA plant is located at Binanigram. Sales are focused in the North India. There are various mini plants operating too which supply cheap cement which has no ISI certification and does not confirm BIS standards. Birla White and Birla Ready mix and also regional brands like Vikram Cement and Rajshree Cement. Gujarat and Rajasthan. JK An entrenched competitor that has brands across the price spectrum with JK Nembahera leading the pack. which was acquired in 1998. has its integrated grey cement plant at Sikka (Gujarat). The company is India’s largest white cement producer with a capacity of 4 lakh tonnes. the demerged cement business of L&T. Offers a good quality product at cheap rates and has very good brand image. BINANI CEMENT A fierce competition with a 2. It holds around 14% of the Rajasthan market. It has one of the world’s largest white plants at Kharia Khangar (Rajasthan).The Aditya Birla Group is the world’s eight largest cement producer.

It has a footprint but not a foothold in Rajasthan market Cement Manufacturing Raw Material Preparation Limestone of differing chemical composition is freely available in the quarries. L&T is a strong player nationally and regarded as quality product. A bucket wheel reclaimer is used to recover and further blend this raw material mix before transfer to the raw material grinding mills. Once these materials have been crushed and subjected to online chemical analysis they are blended in a homogenized stockpile. Raw Mill Transport belt conveyor transfers the blended raw materials to ball mills where it is ground. This limestone is carefully blended before being crushed. The chemical analysis is again checked to ensure excellent quality control of the product.brand’s cement bags. Red mineral is added to the limestone at the crushing stage to provide consistent chemical composition of the raw materials. The resulting ground and dried raw meal is sent to a homogenizing and storage silo for further blending before being burnt in the kilns. 25 .

which completes the burning process of the meal. Clinker is analyzed to ensure consistent product quality as it leaves the cooler.800°C flame. Metal conveyors transport the clinker to closed storage areas. stored and then ground in dedicated mills. Some of the air from the cooler is de-dusted and supplied to the coal grinding Plant. which is heated by a 1. The dry process kiln is shorter than the wet process kiln and is the most fuel-efficient method of cement production available.Fuels The heat required to produce temperatures of 1. At this temperature the chemical changes required to produce cement clinker are achieved.800°C at the flame is supplied by ground and dried petroleum coke and/or fuel oil.450°C. The Petcock is imported via the companies' internal wharf. The meal is heated to a temperature of at least 1. The remaining air is used as preheated secondary air for the main combustion burner in the kiln. Burning The raw meal is fed into the top of a pre-heater tower equipped with four cyclone stages. Careful control of the mills ensures optimum fineness of the Petcock and excellent combustion conditions within the kilns system. 26 . The meal then enters a sloping rotary kiln. As it falls. the meal dehydrates and partially decarbonizes. the meal is heated up by the rising hot gases and reaches 800°C. At this temperature. Cooler Units The clinker discharging from the kiln is cooled by air to a temperature of 70°C above ambient temperature and heat is recovered for the process to improve fuel efficiency.

9% of the dust is collected before venting to the atmosphere. In this way. 99. All dust collected is returned to the process. Constituents Different types of cement are produced by mixing and weighing proportionally the following constituents: • Clinker Gypsum Limestone addition Blast Furnace Slag • • • 27 .Filters Dedicated electrostatic precipitators dedust the air and gases used in the Clinker Production Line Process.

capacity and early movers. 28 . The major players are Binaani.Cement manufacturing from the quarrying of limestone to the bagging of cement. Birla (with products like Birla Super and Birla Chetak). JK (with products like JK Nimbahera). Laxmi. Grasim (with products like Vikram and Birla Plus). Gujarat Ambuja. Business & Managerial Challenges Cement market is highly competitive with major players having advantage of brand equity.

L & T and Kamdhenu. and inflation. its top consumers. Profitability of the business may also be affected by factors such as market conditions. But if this system can be improved upon. but this benefit would also trickle down to the customers. Risk and Return of Cement Companies General Risk Factors • Economic Conditions . 29 . then not only would profitability of the company increase. These industries include the real estate sector and construction companies. and particularly conditions which affect the cement industry. Logistics is the most important cost associated with cement industry. Each of these players has their dominance across whole Rajasthan in addition to their respective regional dominance. ACC. cost plays one of the most important role in this industry. This is the single most important reason for strong dominance of all cement companies in the regions around their factory. interest rates. then Shree Cements Ltd. and costs can be managed.Mangalam (with products like Mangalam and Birla Uttam). Another issue is that the product (cement) cannot be differentiated clearly on the basis of quality and hence. If the company can control cost of manufacturing & distribution.The performance of cement companies may be significantly affected by changes in economic conditions. can strengthen their hold in present states of distribution as well as look forward to gaining foothold in newer and farther regions. DCM Shriram.

These include the demand for cement from China. • Currency Risk: The recent appreciation of the Indian rupee is going to be a major hindrance to export to other countries especially china as well as other nations. Currency risk represents a major issue facing exports however the risk is currently less due to the robust demand for cement in the domestic economy. including those relating to the real estate and construction industry in addition to the cement sector. Ajmer (Rajasthan) 21. Strand Road. In recent times there has been an attempt by the government to control the price of cement by changing the tax structure. such a risk would prove to be a major challenge. Beawar. ABOUT THE ORGANISATION COMPANY COMPANY INCORPORATION YEAR REGISTERED OFFICE CORPORATE OFFICE PROFILE Shree Cement Ltd. • Government policies and legislation –The companies may be affected by changes to government policies and legislation. and other export destinations. Kolkata 30 .• Geo-political Factors –The companies may be affected by the impact that geo-political factors have on the world economy or on financial markets and investments generally or specifically. Taxation and the regulation of trade practices and competition. Such attempts could cause price instability and hit on margins. 1979 Bangur Nagar. However with addition to plant capacity and increase in volume of production.

G. The company has installed capacity of 10. Shree Cements Ltd. THE SHREE VISION Vision “To drive and sustain industry leadership Within a global context .INDUSTRY CHAIRMAN MANAGING DIRECTOR EXECUTIVE DIRECTOR Cement Manufacturing B. Its output is marketed under the Shree Ultra Ordinary Portland Cement’ and ‘Shree Ultra Red Oxide jung rodhak Cement’ brand names.2 mtpa tones per annum in Rajasthan. located at Beawer. support. For the last 18 years. Delhi. it has been consistently producing many notches above the nameplate capacity. Shree manufactures Ordinary Portland Cement (OPC) and Portland Pozzolana Cement (PPC)..M. Singhi Shree Cements Ltd.K. is a Rajasthan based company. Bangur H.by developing individual Competencies at every level. The company retains its position as north India’s largest single-location manufacturer. innovation and reward” 31 . Haryana. Shree’s principal cement consuming markets comprise Rajasthan. Bangur M. Uttar Pradesh and Uttranchal. through a robust Trust. Punjab.

The captive plant generates power at a much lower cost of Rs 2. Earlier dependent on good quality imported coal. Delhi. reducing its consumption per tonne of clinker. a waste from refineries. Haryana. the company's switch to pet coke could not have come at a better time.Guiding Principles Enforce good corporate governance practices • Encourage integrity of conduct • Ensure clarity and un-ambiguity in communication • Remain accountable to all stakeholders • Encourage socially responsible behavior • Mission • To harness sustainability through low carbon philosophy • To sustain its reputation as one of the most efficient manufacturers globally. The company also replaced indigenous refractory bricks with imported substitutes. The company has one of the most energy efficient plants in the world.5 per unit (excluding interest and depreciation) as compared to over Rs 5 per unit from the grid. In appreciation of its achievements in Energy 32 . • To continually have most engaged team • To drive down cost through innovative practices • To continually add value to its products and operations meeting expectations of all its stakeholders Marketing Shree caters to cement demand arising in Rajasthan. In the past two years the price of coal has gone up. In 2000-01. which has achieved over 90 per cent load factor. UP and Punjab. Also. What is strategic for SCL is that it is located in central Rajasthan so it can cater to the entire Rajasthan market with the most economic logistics cost. Shree Cement is the closest plant to Delhi and Haryana among all cement manufacturers in its state and proximity to these profitable cement markets renders the company an edge over other cement companies of the company in terms of lower freight costs. as primary fuel resulting in lower inventory and input costs. SCL has a 160 MW captive thermal power plant. the company has succeeded in substituting conventional coke with 100 per cent pet coke.

sector. an international agency specializing in the rating of cement plants. Shree is rated best by Whitehopleman. 1 2 3 4 Shree Ultra Red Oxide Jung Rodhak Cement (ROC) Shree OPC Bangur Cement Rockstrong Cemento POLICIES: Quality Policy: • To provide products conforming to national standards and meeting customers requirements to their total satisfaction. To continually improve performance and effectiveness of quality management system by setting and reviewing quality objectives for – • a) Customer satisfaction b) Cost effectiveness 33 . PRODUCTS Following are the various products of Shree Cements Ltd. the Company has been awarded the prestigious 'National Energy Conservation Award" various times.

plant and equipment Reduction in emissions. Environment Policy: To ensure: • • • • • Clean. Develop means and methods for water harvesting Treatment of waste discharge water for reuse Educate people for effective utilization and conservation of water Water audit and regular monitoring of water consumption Health and Safety Policy: • • • • To ensure good health and safe environment for all concerned by: Promoting awareness on sound health and safe working practices Continually improving health and safety performance by regularly setting and reviewing objectives and targets Identifying and minimizing injury and health hazards by effective risk control measures 34 .Energy Policy: • • To reduce to the maximum extent possible the consumption of energy without impairing productivity which should help in: Increase in the profitability of the company • • Conservation of Energy Reduction in Environmental pollution at Energy producing areas. noise. energy. green and healthy environment Efficient use of natural resources. waste and greenhouse gases Continual improvement in environment management Compliance of relevant environment legislation Water Policy: • • • • • To provide sufficient and safe water to people and plant as well as to conserve water. we are committed to efficient water management practices viz.

• Complying with all applicable legislations and regulations Human Resource Policy: Shree Cement is committed to: • • • • • • • • Empower people Honor individuality of every employee Non discrimination in recruitment process Develop Competency Employees shall be given enough opportunity for betterment None of the person below the age of 18 shall be engaged to work Incidence of Sexual harassment shall be viewed seriously To follow Safety & Health. Environment. there was not much differentiation among the various brands on offer. • People too did not pay much attention to this product unless there was a need felt. • Because of the product being commoditized. 35 . Quality. Energy policy ADVERTISING Need for Advertising:• Cement has evolved into a highly commoditized product category. Hence people who were currently making their houses or were soon to embark on such a project became the target market. there was a need for differentiation for which there were some changes made to the product. Due to competitive pricing within the industry.

Shree Cement Ltd was not advertising its products for the past few years but looking at the competitive market and opportunities ahead it introduced a new ad campaign which was targeted to differentiate its products from other cement brands. It introduced an ad campaign showing the anti rusting capability of the Red Oxide Cement of the company. Trade and Non-Trade Networks There are two types of Networks: Trade and Non-tradea) Non-trade Network A) Non trade network Non. But still the presence of the company has not been as intense as other brands have like Ambuja and Grasim etc.Trade Network 36 .

B) Trade Network Company Handling Agent Stockiest Retailers Cons umers SWOT ANALYSIS Strength and weaknesses are essentially internal to the organization and relate to the matter Concerning resources.Govt. programmes and organization in key areas such as • Sales • Marketing • Capacity • Manufacturing cost etc Opportunity and Threat are external to the organization and can exist or develop in the following areas • Size & Segmentation • Growth pattern and maturity • International dimensions • Relative attractive of segments 37 . Any industrial projects taken up by the private sector like bridges. Housing Projects Railways Airports Cement Roads Bridges Dams Canals These are all bulk requirements – – – for Group housing / retail housing Contractor’s projects on behalf of govt. roads etc. Non-trade Private Non-trade for govt infrastructure building Govt.

Good relation with bankers thus for expansion of business they need not to look too far. Company has its own electricity production unit thus need not to depend on the Availability of power n dependency on electricity department. Well transport facility. any time they may switch to other. Huge land available for expansion of business in future. Technical knowledge is less at lower level of employee. 38 .• New Technologies etc STRENGTH • • • • • • • • Company is established in Beawar where most of the land is rocky and material is suitable for the production of cement. policy as they may increase the tax. Few major players are situated near the main plant thus market share is difficult to Increase. Threats • • • • • • • Changing customer taste. Advancement in technology. Very less advertising thus in other part of country it’s not as popular. is planning for betterment on infra structure thus there will be huge demand for cement. Non availability on raw material. thus it is closely bound to the resources. thus they may get the market from the switchers. Upper level of management is too skillful. Labor and higher technical personnel may switch to another plants. Specific chemical composition which makes it co erosion free and also have very Good chemical recovery efficiency. It’s difficult for them to change to an alternate line o production with existing Machinery. Liberalization of geographic works. Maintain a very good customer loyalty and relationship. Booming real estate sector. which is draw back for Achieving maximum profit. thus they can enter into different market. Change in Govt. Govt. Entry of new player. Weakness • • • • Poor access of distribution. Opportunities • • • • • • Changing customer taste. Thus people give preference to the brand. Leading brand in north India. A very superior production quality thus customer is always satisfied. it has its own railway track.

Noida.2007 in recognition of excellent Environment Management practices National Awards for Energy Conservation from Ministry of Power. an International Cement Consultants.2007 for Excellence in Corporate Governance Golden Peacock Award . Govt of India CII National Award for Excellence in Energy Management 2006 National Safety Award awarded by the Honorable President of India. Pratibha Patil Best Annual Report Award by Rajasthan Industry in 2007 Chamber of Commerce and • • • • • • • “Amity Corporate Excellence Award” by Amity International Business School.AWARDS OF THE COMPANY • • 4 star rating from Whitehopleman UK. Smt. since 2000 (No one in world has been rated 5 star!! Reckoned as 2nd fastest growing mid sized Company in 2006 by “Business Today” a national level magazine (6 May 07 edition Golden Peacock Award . ICWAI National Award 2005 for excellence in cost management 39 • .

Financial Performance & Analysis.• • • Green-Tech Environment Excellence Award Golden Peacock Award for Combating Climate Change Corporate Excellence Award by Rajasthan Chamber of Commerce & Industry (RCCI) in all four categories namely Corporate Governance & Capital Market. 2008 to march 24. for the completion of 1 new mtpa plant in a record 12 months –from march 23. • 40 . Note: Recently their name is registered for Limca book of Records (National Records 2010). 2009. Business & Qualitative Aspects and Annual Report Presentation as well as Management SILVER CIO Award by the CIOL Dataquest Enterprise Connect Awards 2008.

COST OF CAPITAL The main objective of a business firm is to maximize the wealth of its shareholders in the long-run. The various sources of funds to the company are in the form of equity and debt. In this chapter. There are main two sources of capital for a company – shareholder and lender. A business firm can raise capital from various sources such as equity and or preference shares. On the basis of it the management evaluates alternative sources of finance and select the optimal one. This capital is invested in different projects of the firm for generating revenue. CONCEPT OF COST OF CAPITAL 41 . What should be this minimum return? The concept used to determine this minimum return is called Cost of Capital. The cost of capital is the rate of return the company has to pay to various suppliers of fund in the company. debentures. The cost of equity and cost of debt are the rate of return that need to be offered to those two groups of suppliers of the capital in order to attract funds from them. the Management Should only invest in those projects which give a return in excess of cost of fund invested in the project of the business. The difficulty will arise in determination of cost of funds. On the other hand. retain earning etc. The primary function of every financial manager is to arrange adequate capital for the firm. Therefore. each project must earn so much of the income that a minimum return can be paid to these sources or supplier of capital. concepts and implications of firms cast of capital. determination of cast of difference sources of capital and overall cost of capital are being discussed. it is necessary for the firm to pay a minimum return to each source of capital. if is raised from different sources and different quantum.

it is the investors required rate of return. In practice the borrowing rates used indicate the cost of capital in preference to landing rates.e.. Solomon Ezra. 55 lacks i. Technically and Operationally. On the other hand form the point of view of the firm using the capital. cost of capital is reward for the use of capital. If the return less then this. Similarly. but its rate of return which it requires on the projects. MINIMUM RATE OF RETURN: 42 .A. Author Lutz has called it” BORROWING AND LANDING RATES”. Hampton. 5 Crore in such a way that it earn at least Rs. 5 crore at an interest of 11% P. For example if a firm borrows Rs. The borrowing rates means the rate of interest which must be paid to obtained and use the capital. “The cost of capital is the rate of return in the firm requires from investment in order to increase the value of firm in the market place”. It may also the opportunity cost of the funds to the firm i. the cost of capital define as the minimum rate of return a firm must earn on its investment in order to satisfy investors and to maintain its market value. Cost of capital also refers to the discount rate which is used while determining the present value of estimated future cash flows.” FEATURES OF COST OF CAPITAL It is not a cost in reality the cost of capital is not a cost as such. Thus.Cost of capital is the measurement of the sacrifice made by investors in order to invest with a view to get a fair return in future on his investments as a reward for the postponement of his present needs.e. what the firm would earn by investing these funds elsewhere. landing rate is the rate at which the firm discounts its profits.e. then the cost of capital is 11%. I. rate of return at 11%. Hear it’s the essential for the firm to invest these Rs. has called “It the minimum required rate of return or the cut of rate for capital expenditure. then the rate of dividend which the share holder are receiving till now will go down resulting in a decline in its market value thus the cost of capital is the reward for the use capital. In the other word of John J. cost of capital is the price paid to the investor for the use of capital provided by him.

e. Business risks is the measurement of variability in profits due to changes in sales. In various methods of discounted cash flows of capital budgeting.. Capital budgeting decisions: the cost of capital sources as a very useful tool in the process of making capital budgeting decisions. I comparing the various specific costs of different sources of capital. The progressive management always likes to consider the cost of capital while taking financial decisions as it’s very relevant in the following spheres. while financial risks depends on the capital structure i. Acceptance or rejection of any investment proposal depends upon the cost of capital. 1.. Designing the capital structure: the cost of capital is the significant factor in designing a balanced an optimal capital structure of a firm. A proposal shall not be accepted till its rate of return is greater then the cost of capital. 3. SIGNIFICANCE OF CONCEPT OF COST OF CAPITAL The cost of capital is very important concept in the financial decision making. that equity mix of the firm. REWARDS FOR RISKS Cost of capital is the reward for the business and financial risk. Comparative study of sources of financing: there are various sources of financing a project.Cost of capital is the minimum rate of return a firm is required in order to maintain the market value of its equity shares. While designing it. the management has to consider the objective of maximizing the value of the firm and minimizing cost of capital. which source should be used at a particular 43 . 2. cost of capital measured the financial performance and determines acceptability of all investment proposals by discounting the cash flows. the financial manager can select the best and the most economical source of finance and can designed a sound and balanced capital structure. Out of these.

If the actual profitability of the project is more than the actual cost of capital. Such as evaluations can be done by comparing actual profitability of the project undertaken with the actual cost of capital of funds raise o finance the project. If a firms cost of capital is high. Historical Cost and future Cost Historical Cost represents the cost which has already been incurred for financing a project. risk is more and capital structure is imbalanced. It is calculated on the basis of the past data. CLASSIFICATION OF COST OF CAPITAL 1. Specific Cost and Composite Cost 44 . the performance can be evaluated as satisfactory.point of time is to be decided by comparing cost of different sources of financing. Although cost of capital is an important factor in such decisions. In financial decisions future costs are more relevant than historical costs. Knowledge of firms expected income and inherent risks: investors can know the firms expected income and risks inherent there in by cost of capital. decisions can be taken regarding dividend policy. investors expect higher rate of return. in such situations. but equally important are the considerations of retaining control and of avoiding risks. 6. The source which bears the minimum cost of capital would be selected. Financing and Dividend Decisions: the concept of capital can be conveniently employed as a tool in making other important financial decisions. On the basis. Evaluations of financial performance of top management: cost of capital can be used to evaluate the financial performance of the top executives. Future cost refers to the expected cost of funds to be raised for financing a project. 2. 5. capitalization of profits and selections of sources of working capital. 4. it means the firms present rate of earnings is less. Historical costs help in predicting the future costs and provide an evaluation of the past performance when compared with standard costs.

the specific cost of those sources of capital alone must be considered. the composite cost of capital should be as an acceptance/ rejection criterion. Marginal cost of capital may be defined as the ‘Cost of obtaining another rupee of new capital.Specific costs refer to the cost of a specific source of capital such as equity share. In other words. 45 . Preference share. Port field has defined the implicit cost as “the rate of return with the best investment opportunity for the firm and its shareholders that will be forgone if the project presently under consideration by the firm were accepted. While evaluating a capital expenditure proposal. On the other hand.’ When a firm rises additional capital from only one sources (not different sources). Thus. the explicit cost of capital is the internal rate of return which a firm pays for procuring the finances. Explicit Cost and Implicit Cost Explicit cost refers to the discount rate which equates the present value of cash outflows or value of investment. retain earnings etc. it is the composite cost which should be considered for decision-making and not the specific cost. 3. In other words. its explicit cost will be zero percent as no cash outflow in the form of interest are involved. the opportunity cost of the funds is the implicit cost. 4. If a firm takes interest free loan. Marginal cost tends to increase proportionately as the amount of debt increase. the implicit cost represents the rate of return which can be earned by investing the funds in the alternative investments. Average Cost and Marginal Cost Average cost of capital refers to the weighted average cost of capital calculated on the basis of cost of each source of capital and weights are assigned to the ratio of their share to total capital funds. But where capital from only one source is employed in the business. Marginal cost is considered more important in capital budgeting and financing decisions. Composite cost of capital refers to the combined cost of various sources of finance. debenture. It is also termed as ‘overall costs of capital’. than marginal cost is the specific or explicit cost. it is a weighted average cost of capital.” Thus implicit cost arises only when funds are invested somewhere. When capital from more than one source is employed in the business.

because interest 46 . The firm’s capital structure remains unchanged. This can be measured in either before. For example. equity shares.or after-tax returns. The computation procedure of specific costs is explained in the pages that follow – COST OF DEBT CAPITAL Cost of Debt is the effective rate that a company pays on its current debt. however. The financial and business risks are not affected by investing in new investment proposals. the following assumptions are made: • • • • • The cost can be either explicit or implicit. Computation of specific cost of capital helps in determining the overall cost of capital for the firm and in evaluating the decision to raise funds from a particular source. retained earnings etc. All these sources are called components of capital. Computation of specific costs A firm can raise funds from different sources such as loan. Cost of each source of capital is determined on an after tax basis. if the company would have distributed these earning to them as dividends. The cost of capital of these different sources is called specific cost of capital. Therefore.otherwise not. explicit cost will arise only when funds are raised whereas implicit cost arises when they are used. the implicit cost of retained earnings is the rate of return which the shareholder could have earn by investing these funds. preference shares. Assumption of Cost of Capital While computing the cost of capital. Costs of previously obtained capital are not relevant for computing the cost of capital to be raised from specific source.

the relation of the interest rate is to be established with the actual amount realised or net proceeds from the issue of debentures. Cost of Debt = (before-tax rate x (1-marginal tax)) The before tax rate of interest can be calculated as below: 47 . The measure can also give investors an idea as to the riskiness of the company compared to others. loans and other forms of debt. Firms with high corporate tax rates also tend to have higher debt ratios and use more debt incrementally. To get the after-tax rate. Traditionally. you simply multiply the before-tax rate by one minus the marginal tax rate. which also includes the cost of equity. the cost of debt capital is the contractual interest rate adjusted further for the tax liability of the firm. so this measure is useful for giving an idea as to the overall rate being paid by the company to use debt financing. 100 each at par. 5 lacs of Rs. If the company earns less than this interest rate (12%) than the income available to the shareholders will be reduced and the market value of the share will go down. But. because riskier companies generally have a higher cost of debt. tax savings that occur because interest is deductible while equity payout is not have been modelled as a primary benefit of debt. A company will use various bonds. the after-tax cost is seen most often. Example-: If a company issues 12% debentures worth Rs. Therefore.60000(12% of Rs. in a trade-off context: Firms choose their optimal debt ratio by balancing the benefits and costs. then it must be earn at least Rs. This is one part of the company's capital structure. Large firms with tangible assets and few growth options tend to use a relatively large amount of debt. to know the real cost of debt. 5 lacs) per year on this investment to maintain the income available to the shareholders unchanged. Much theoretical work characterizes the choice between debt and equity.expense is deductible.

however. A preference shareholder enjoys priority in terms of repayment vis-àvis equity shares in case a company goes into liquidation. At par = Par value – Floatation cost = Par value + Premium – Floatation cost = Par value – Discount – Floatation cost 2. Thus the Cost of Preference Capital is 0 (Zero). therefore. When additional equity shares are issued. At premium 3. In the companies under observation only India Cement has preference shares issued. the new equity share holders get proponate share in future dividend and undistributed profits 48 . Preference Shares are the shares that have a preferential right over the dividends of the company over the common shares. Preference shareholders. some financial experts hold the opinion the p.s capital does not carry any cost but this is not true. do not have ownership rights in the company. COST OF EQUITY SHARE CAPITAL The computation of cost of equity share capital is relatively difficult because neither the rate of dividend is predetermined nor the payment of dividend is legally binding.= Interest Expense of the company ---------------------------------------Total Debt X 100 Net Proceeds: 1. Cost of Preference Capital = Preference Dividend/Market Value of Preference Shree Cement has not paid any dividend to the Preference Shareholders. At Discount COST OF PREFERENCE SHARE CAPITAL Preference share is another source of Capital for a company.

The cost of equity can be computed by any of the following method: 1. it had been assumed that present rate of dividend will remain the same in future also. it is the duty of the management to see that the company must earn at least so much income that the market price of its existing share remains unchanged. If reduces the earning per shares of existing share holders resulting in a fall in marker price of shares. then adjustment for this increase is essential to compute the cost of capital. if the management estimates that companies present dividend will increased continuously for the year to come. Therefore. For example if the EPS increase at the rate of 10% per year. the DPS and market price per share would show an increase at the rate of 10%.project in order to leave unchanged the market price of its shares.of the company. But. Thus. Dividend yield method: Ke = DPS\MP*100 Ke= cost of equity capital Dps= current cash dividend per share Mp=current market price per share 2. cost of equity capital is computed by adjusting the present rate of dividend on the basis of expected future increase in company’s earning. This expected minimum rate of return is the cast o equity share capital. under this method. cost of equity share capital may be define as the minimum rate of return that a firm must earn on the equity financed portion of a investment. Earning yield method: Ke= EPS\mp*100 Eps= earnings per share 3. Dividing yield plus growth in dividend method: While computing cost of capital under dividend yield(d\p ratio)method. 49 . The growth rate in dividend is assumed to be equal to the growth rate in earning per share. at the time of issue of new equity shares. Therefore.

The company’s risk does not change i. In order to overcome this difficulty. Cost of newly issued equity shares when new equity share are issued by a company. the average rate of return actually realise in the past few year by the investors is used to determine the cost of capital. the amount of net proceeds is calculated by deducting the issue expenses form the expected market value or issue price. Any of the following formulae may be used for this purpose: Ke= DPS\NP*100 Or Ke= EPS\NP*100 Or 50 . the realised yield is discounted at the present value factor. Under this method. it is very difficult to estimate the rate of return on investment. 4. The alternative investment opportunities. including underwriting commission. To ascertain the cost of capital. it is not possible to realise the market price per share. brokerage etc. dividend per share or EPS is divided by the amount of net proceeds. and The market of equity share of the company does not fluctuate widely. and then compare with value of investment this method is based on these assumptions. yield the return which is equal to realised yields in the company. elsewhere for the investor.e.Ke= DPS\MP*100+G G= Growth rate in dividend. dividend and growth rate are stable. because the company has to incur some expenses on new issue. Realised yield method: In case where future dividend and market price are uncertain. so.

every share holders expects from the company that much of income on retained earnings for which he is deprived of the income arising o its alternative investment. The profitability of these projects is evaluated by comparing the expected rate of return with overall cost of capital of the firm. it is assumed to cost free capital that is not true. The overall cost of capital is the weighted average of the costs of the various sources of the funds. 51 . is an average of the cost of specific sources of capital employed in the business properly weighted by the proportion they held in firm’s capital structure. Though retain earnings like retained earnings like equity funds have no explicit cost but do have opportunity cost. weighted average as the name implies. companies create sufficient fund for the financing through internal sources. Thus year by year. But . A part of such profit is retained for future expansion and development. neither the company pays any cost nor incur any expenditure for such funds. It is equal to the income what a share holders could have earns otherwise by investing the same in an alternative investment. income forgone or sacrificed is the cost of retain earnings which the share holders expects from the company. Therefore. the debt. the preference share capital. WEIGHTED AVERAGE COST OF CAPITAL Once the specific cost of capital of the long-term sources i. The opportunity cost of retained earnings is the income forgone by the share holders. Thus. The capital raised from various sources is invested in different projects. weights being the proportion of each source of funds in the total capital structure. the next step is to calculate the overall cost of capital of the firm. if the company would have distributed the earnings by way of dividend instead of retaining in the business. company’s do not distribute the entire profits by way of dividend among their share holders. Thus.e. Therefore .Ke=DPS\NP*100+G COST OF RETAIN EARNINGS OR INTERNAL EQUITY Generally. the equity share capital and the retained earnings have been ascertained. It is also termed as ‘Composite Cost of Capital’ or ‘Overall Cost of Capital’ or ‘Average Cost of Capital’.

no market value is available for the particular type of security. Its computation requires: 1. The cost of each specific source of finance is calculated according to the prevailing market price. Book value weights are the relative proportion of various sources of capital to the total capital structure of a firm. How to calculate? Though. According to him. Theoretically. Assignment of Weights: First of all. specially in case of retained earnings can indirectly be estimated by Gitman’s method. the firm has to find out the current market price of each security in each category. Market value weights may be calculated on the basic on the market value of different sources of capital i. Yet there are many problems in its calculation.e. But. retained earnings are treated as equity capital for calculating cost of specific sources of funds. The market value of equity share may be considered as the combined market value of both equity shares and retained earnings or individual market value (equity shares and retained earnings) may also be determined by allocating each of percentage share of the total market value to their respective percentage share of the total values. 1. the assignment of the weight on the basic of market value is operationally inconvenient as the market value of securities may frequently fluctuate. In order to calculate the market value weights. Weight can be either ‘book value weight’ or ‘market value weight’. the proportion of each source at its market value. weights have to be assigned to each source of capital for calculating the weighted average cost of capital. 10 each ad retained earnings of Rs.WEIGHTED AVERAGE. The book value weight can be easily calculated by taking the relevant information from the capital structure as given in the balance sheet of the firm. Moreover. the use of market value weights for calculating the weighted average cost of capital is more appealing due to the following reasons: • • The market values of securities are closely approximate to the actual amount to be received from the proceeds of such securities. if the market price 52 .000 equity shares of Rs.00. the concept of weighted average cost of capital is very simple.the capital structure of a company consists of 40. sometimes.000. For example:.

are to be calculated. 3.000* 18) which can be allocated between equity capital and retained earnings as followsMarket Value of Equity Capital = 7. Computation of Specific Cost of Each Source : After assigning the weight. In financial decisions.000 =Rs.000.76. 18.00. 1.000/5.44. the weighted average cost is calculated by multiplying the cost of each source by its appropriate weights and weighted cost of all the sources is added.000*4. if any source has ‘before tax’ cost.000*1. Kw = Weighted average cost of capital X = After tax cost of different sources of capital W = Weights assigned to a particular source of capital 53 . 5.20.00. than total market value of equity shares and retained earnings would be Rs. Therefore. all costs are ‘after tax’ costs.000/5. Computation of Weighted Cost of Capital : After ascertaining the weights and cost of each source of capital.of company’s equity share is Rs.00. 2.00.20.000 =Rs. This total of weighted costs is the weighted average cost of capital.000.20. 7. specific costs of each source of capital.000 (40. The following formula may be used for this purpose : Kw = ∑XW/∑W Here. as explained earlier. Market Value of Retained Earnings= 7. it has to be converted in to ‘after tax’ cost.

10 . Capital Retained Earning P.000 1.10850 or 10. Capital Debentures Total (2) 3.09 Weights After tax Cost (4) Weighted Cost (5)= (3) * (4) .35 .00.50.0270 .000 10.00.Example : Following information is available with regard to the capital structure of ABC Limited : Sources of Funds E.000 After tax cost of Capital .50. Computation of Weighted Average Cost of Capital Source Amount Rs.10 .09 1.) 3.20 .S. (1) E. Capital Debentures Amount(Rs.50.S.85% Weighted Average Cost of Capital (WACC) CALCULATION OF COST OF CAPITAL OF SHREE CEMENT LTD.S.000 .000 2.13 .0200 .0195 .000 1.00 (3) .1085 .000 2.09 You are required to calculate the weighted average cost of capital.13 .10 .12 .S.00.00.00.000 3. Capital Retained Earning P.0420 .12 .000 3. Cost of Debt Capital: 54 .50.

....36 lacs Tax Rate = 30% Interest Expense of the company Kd (before tax) = -------------------------------------------Total Debt X 100 Kd (before tax) = 13065......... 161570......08 % Kd (after tax) = Interest Rate Before Tax – Tax Rate ( 30%.37 X 100 = 8.37 lacs Total Interest Paid = 13065.............For the year 2009-10: Total Debt Capital = Term loan from Banks + Debts = 131570.........30% = 5...36 .08% ......65 % For the year 2008-09: 55 ..37+30000 = 161570.) Kd (after tax) = 8....

20 % For the year 2007-08 56 .85 % X 100 X 100 Kd (after tax) = Interest Rate Before Tax – Tax Rate ( 30%.94 Tax Rate = 30% Interest Expense of the company Kd (before tax) = -------------------------------------------Total Debt 9355.30% = 6.94 lacs Total Interest Paid = 9355.94 Kd (before tax) = ---------------------105716.94 = 8.) Kd (after tax) = 8.85% .Total Debt Capital = Term loan from Banks + Debts = 105716.94+000 = 105716.

72 Kd (before tax) = ---------------------113373.50% X 100 Kd (after tax) = 8.95% For the year 2006-07 Total Debt Capital = Term loan from Banks + Debts 57 .18+800 = 113373.72 lacs Tax Rate = 30% 9636.Total Debt Capital = Term loan from Banks + Debts = 112573.18 = 8.50% .18 lacs Total Interest Paid = 9636.30% = 5.

= 83427.02+1400= 84827.02lacs Total Interest Paid = 6573.02lacs Tax Rate = 30%

6573.02 Kd (before tax) = ---------------------84827.02 = 7.25% X 100

Kd (after tax)

=

7.25% - 30%

= 5.42%

COMPARATIVE CALCULATION OF Kd FOR FOUR YEAR

Particular

2009-10

2008-09

2007-08

2006-07

58

Total Debts (Term loan from 131570.37+ Bank+ Debts) 30000 =161570.37 Total Interest paid Interest Rate (Before Tax) 13065.36 8.08%

105716.94+ 000 =105716.94 9355.94 8.85% 6.20%

112573.18+ 800 =113373.18 9636.72 8.50% 5.95%

83427.02+ 1400 =84824.02 6573.86 7.75% 5.42%

Interest Rate (After Tax)= Interest 5.65% Rate Before Tax – Tax Rate 30%.

COST OF EQUITY CAPITAL:

EQUITY SHARE CAPITAL
Particular 2009-10
59

2008-09

2007-08

2006-07

No. of Shares (In lacs)

348.37

348.37

348.37

348.73

DPS Given

13

10 710.50

8 1079.40

6 921.85

Market Price (at the end of 2300.05 March) Earning per equity share 194.07 of rs. 10(in Rs.) Final dividend on equity 4528.84 share (in lacs) Market Capitalisation (in 801268.41 Lacs)

165.91

74.74

50.81

3483.72

2786.98

Not given

247516.88

376033.01

321146.96

1.

Dividend yield plus growth in dividend method:-

Ke = DPS\mP*100 + G

Dps = Current cash dividend per share Mp = Current market price per share G = Growth rate

= 13Rs. = 2300.05 Rs. = 10%

13 Ke = -------------------2300.05 X 100 + 10%

=

10.56%
60

07 Ke = -------------------2300.05 Rs. of Equity Share = 348.84 Lacs No.37 Lacs 4528. Mp = Market prise = 2300.07 Rs.84 Ke = -------------------348. 194.2.05 X 100 = 8.37 = 13 COST OF EQUITY SHARE CAPITAL (KE) 61 . Dividend per share method:- Ke = Proposed final dividend on Equity Share / No. Earning yield method:Ke= EPS\mp*100 Eps = earning per share = 194.43% 3. of Equity Share Final dividend on Equity Share = 4528.

.56 WEIGHTED AVERAGE COST OF CAPITAL (WACC) WACC = (We * Ke) + (Wd * Kd) Where………. 62 . We = Weight of equity Wd = Weight of Debt.Particular Dividend Per share method Earning Yeild Method Dividend yield plus growth method 2008-09 13 8..43 10.

Weights After tax Cost Weighted Cost (5)= (3) * (4) 8.8322 * 10.1678 *05.79 0.00 (3) (4) 10.78 .1678 1.74 (1) E.65 Weighted Average Cost of Capital (WACC) 9. Capital Debentures Total (2) 801268.37 962838.8322 .74% WACC OF SHREE CEMENT LIMITED (2008-2009) 63 .Ke = Cost of Equity Share capital Kd = Cost of Debt.56 05.74% Source Amount Rs.95 9.65 ) = 9. capital WACC = ( 0.41 161570.56) +( 0.S.

Small changes in the capital structure of the firm will be noted by small changes in overall cost of capital of the firm. It offers a number of advantages including the followings1. 2. the weighted average cost of capital is more accurate as a cut-off rate in selecting the capital budgeting proposals. If an investment proposal is accepted below this limit. This cut-off rate determines the miimum limit for accepting an investment proposal. the finance manager decides the cut-off rate for taking decisions relating to capital expenditure proposals. Therefore. this cut-off rate is always decided above the weighted average cost of capital. Accurate when Profits are Normal : During the period of normal profits. 4. 64 . the firm incur a loss. It is because the weighted average cost recognises the relatively low debt cost and the need to continue to achieve the higher return on the equity financed assets. It employs a direct and reasonable methodology and is easily calculated and understood.MERITS OF WEIGHTED AVERAGE COST OF CAPITAL The WACC is widely used approach in determining the required return on a firm’s investments. Ideal Creation for Capital Expenditure Proposals : With the help of weighted average cost of capital. Responsiveness to Changing Condition : Since. Straight forward and logical : It is the straightforward and logical approach to a difficult problem. 3. the weighted average cost of capital reflects each element in the capital structure. it is based upon individual debt and equity components. It depicts the overall cost of capital as the some of the cost of the individual components of the capital structure.

Unsuitable in case of Excessive Low-cost Debts : Short term loan can represent an important sources of fund for firm experiencing financial difficulties. the problem becomes more intricate. 3. Difficulty in Assigning Weights : The main difficulty in calculating the WACC is to assign weight to different components of capital structure. not earning profit as compared to other firms in the industry. but it is not always correct. Selection of Capital Structure : The selection of capital structure to be used for determining the WACC is also not easy job. there are two type of weights. important among them are as follows : 1.e. If the firm accepts low-return projects on the basic of this low WACC. current capital structure is regarded as the optimal structure. the firm will be in a high financing risk. Research Methodology The research methodology was subdivided and performed in the following method65 . 2. Though. When the securities of the company are unlisted. the inclusion of such debts in the calculation of cost of capital will result in a low WACC. 4. Hence. WACC will be inaccurate and of limited value. Which of these capital structure be selected. current capital structure. the problem is which type of weight should be assigned. Unsuitable in Case of Low Profits : If a firm is experiencing a period of low profits. Three types of capital structure are there i. These two type of weights give different results. Normally. When a firm relies on Zero cost (in the form of payables) or low cost short term debt.LIMITATION OF WEIGHTED AVERAGE COST OF CAPITAL The weighted Average cost approach also has some weaknesses.(i) book value weights and (ii) market value weight. but the market value of each component of capital of a company is not readily available. Generally. marginal capital structure and optimal capital structure. market value is more appropriate than book value.

Connection of the data regarding the use of Cost of Capital and financial policies for Shree Cement. Study of the complete process of the uses of Cost of Capital using literature and discussing with the organizational guide. DATA SOURCNG While performing this project both Primary as well as Secondary Data sources were use. 66 . I adopted a holistic approach and toiled to collect the information about the company other than Shree Cement through secondary sources such as internet. newspaper. QUESTIONNAIRE The information provided by you (customer) is for the research work and will be kept confidential. 1. magazines. Secondary Data:It included information provided by the company workers.• • • • • • • Analyzing relevant figures and date for the last financial years. necessary suggestions regarding the financial structure are given. research papers . On the basis of the data collected. Preparing a questionnaire for the customers to know the image of the company in the market. 2.. Analyzing the future outlook of the companies and its expansion plan. online data basis ect. On the basis of the questionnaire necessary suggestion are given. Primary Data:Major source of data for the project were the pass years’ financial statement and information gather from my guide questionnaire also played a vital role.

000-3.000 [ ] 4. Laxmi Cement [ ] e. Average [ ] [ ] b.000 [ ] [ ] b. What is the status of availability of the grand in you area? a. Above Rs. Always d. Up to Rs. Brief recommends your views for the improvement of the brand? 67 . Excellent d. 3. How would you rank Shree Cement the basis of its brand image? a. Holdings [ ] d. Wall painting [ ] e.Good [ ] 8.000 [ ] d. Birla White Cement [ ] 5. 1. Rs. Poor [ ] [ ] c.Name:2.000 c.Sometimes [ ] 9. Banners [ ] b. Poor [ ] [ ] c. Shree Cement [ ] b. Strength ness [ ] 6.With your help we will be able to improve customer service level. J. Durability [ ] b. Promotional offers 10. 00. 50.000-1. Advertising [ ] [ ] c.Good [ ] 7. Rs.50. Occupation: 3. Mostly e.50. What is your opinion about the quality of Shree Cement? a. Which cement brand do you prefer? a.Very good e. [ ] d. What influenced you to buy this particular brand? a. 1.K. News Paper [ ] [ ] c. Never [ ] [ ] c. Excellent d.ACC Ltd. Rarely [ ] [ ] b. Ambuja cement [ ] c. What promotional tools should company adopt to promote their product? a. Low price [ ] d.Very good e.00. Income Group : a. Average [ ] [ ] b. 50. Sustainability e.

com 68 .shreecementltd.08-09.09-2010. 07-08. 2) www.Ans: ………………………………………………………………………………………… ………………………………………………………………………………………… ………………………… Bibliography 1) Shree Cements annual reports 2006-07.

and India Cement Ltd.wikipedia.com 17) www.org 13) http://www. Business Consulting and Research.htm 5) www.investopedia. Grasim Industries Ltd.3) ASSOCHAM Report on Cement Industry 2007 4) www.moneypore.htm 7) Fundament of Financial management by Brigham & Huston. 10) Quarterly Performance Analysis of Companies.moneycontrol.indiancementindustry. Higgins 9) Financial Reports of ACC ltd. Pandey (Book) 69 .worldcement.org/programme/industry/cement_rating. Gujarat Ambuja Cement Ltd.com 16) http://www.cseindia..com 15) http://www.com 18) Times of India (News Paper) 19) Economic times (News paper) 20)Financial management by Ravi M Kishor (Book) 21)Financial management by M. India Cement Industry: Cygnus. 8) Analysis Financial Management by Robert C.cmaindia.com 14) http://www. 11) Prowess Online Database 12) www.com 6) international_cement_industry.

News Paper [ ] [ ] c. Banners [ ] b. Wall painting [ ] e. What promotional tools should company adopt to promote their product? a. Promotional offers 10.9. Holdings [ ] d. Brief recommends your views for the improvement of the brand? Ans: «««««««««««««««««««««««««««««««««« «««««««««««««««««««««««««««««««««« «««««««««« 70 .

com 3) ASSOCHAM Report on Cement Industry 2007 4) www.com 15) http://www. Higgins 9) Financial Reports of ACC ltd. Cement Ltd. and India Cement Ltd.org 13) http://www.worldcement. Pandey (Book) Gujarat Ambuja 71 . India Cement Industry: Cygnus.com 14) http://www. Grasim Industries Ltd.htm 5) www. 10) Quarterly Performance Analysis of Companies. 07-08.com 17) www.com 6) international_cement_industry.08-09.investopedia. 8) Analysis Financial Management by Robert C.shreecementltd..cmaindia.wikipedia.htm 7) Fundament of Financial management by Brigham & Huston. Business Consulting and Research.moneycontrol. 11) Prowess Online Database 12) www.cseindia.org/programme/industry/cement_rating. 2) www.indiancementindustry.Bibliography 1) Shree Cements annual reports 2006-07.com 16) http://www.09-2010.moneypore.com 18) Times of India (News Paper) 19) Economic times (News paper) 20) Financial management by Ravi M Kishor (Book) 21) Financial management by M.

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